PayPal: A History

PayPal now shares a headquarters with eBayFor those of you who are curious about PayPal's history, this section is for you. While PayPal: A History will not provide much in terms of answers to your PayPal problems, it will give you a background and understanding of the company from conception, to inception, to now.

PayPal: A History is a section based on facts and factual information -- while this site does make occasional commentary or offer occasional opinions on those facts, that is not this section's main focus. For your convenience, we have provided a clickable table of contents so you can go straight to the section that interests you the most.


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Table of Contents / Quick Link Guide


What is PayPal?

Here is how PayPal describes themselves: PayPal is an eBay company that enables anyone with an email address to send and receive online payments safely, easily and quickly.

PayPal is a global leader in online payments, and available in 103 countries and regions and 16 currencies. It has more than 140 million customer accounts worldwide. Over 90% of eBay.com listings offer PayPal as a payment option and many sellers prefer it as the most convenient way to pay and get paid.


How Does PayPal Work?

As a buyer, you can pay for your item online through PayPal. You have the choice of funding your payment with your debit card, credit card, bank account or PayPal balance. Sellers are notified by email of your PayPal payment immediately, and can confidently post the goods to you right away.

As a seller, you can then withdraw those funds to your bank account or use them to send a payment to someone else. If for any reason a refund is required, a seller can easily and quickly send a refund to the buyer directly into their PayPal account.

Source: eBay.com


Why PayPal?

PayPal is the preferred way to send secure payments on eBay. With PayPal, you have an online account that makes it easy to send money from a variety of sources (like your credit card or bank account) to a variety of recipients (such as eBay sellers, online stores or your landlord) -- without sharing your financial information. The recipient never sees your credit card number or your banking information.

Source: eBay.com


Benefits of a PayPal Account

According to PayPal.com, these are the benefits of having a PayPal account:

(1) PayPal is free for buyers.

(2) PayPal is accepted on almost all eBay listings. Over 90% of items listed for sale on eBay.com accept PayPal as a payment method.

(3) Shop without sharing your financial information. PayPal enables you to pay without the seller ever seeing your bank account or credit card numbers.

(4) Free PayPal buyer protection. When you pay with PayPal, you may receive up to $2,000 coverage at no additional cost. If you seller has a feedback score of 50 or more (98% positive), you may receive $2,000 coverage. If your seller does not meet this feedback requirement, you may be covered up to $200.

(5) No credit card needed until you're ready to pay. Credit card information is not required to sign up for PayPal. This information is only needed when you're ready to pay for an item.

Source: eBay.com


PayPal: The Public History

PayPal is the result of a March 2000 merger between Confinity and X.com.Confinity was founded in December 1998 by Max Levchin, Peter Thiel, and Luke Nosek, initially as a Palm Pilot payments and cryptography company. Both Confinity and X.com launched their websites in late 1999. X.com was founded by Elon Musk in March 1999, initially as an Internet financial services company. Both companies were located on University Avenue in Palo Alto. Confinity's website was initially focused on reconciling beamed payments from Palm Pilots with email payments as a feature and X.com's website initially included financial services with email payments as a feature.

At Confinity, many of the initial recruits were alumni of The Stanford Review, also founded by Peter Thiel, and most early engineers hailed from the University of Illinois at Urbana-Champaign, recruited by Max Levchin. On the X.com side, Elon Musk recruited a wide range of technical and business personnel, including many that were critical to the combined company's success, such as Amy Klement, Sal Giambanco, Roelof Botha, Sanjay Bhargava and Jeremy Stoppelman.

To block potentially fraudulent access by automated systems, PayPal devised a system of making the user enter numbers from a blurry picture, which they coined the Gausebeck-Levchin test. According to Eric M. Jackson, author of the book The PayPal Wars, PayPal invented this system now in common use. Although, there is evidence AltaVista used a CAPTCHA as early as 1997, before PayPal existed. The neutrality of The PayPal Wars, which was self-published by Eric Jackson through his company World Ahead Publishing, funded in part by Peter Thiel, is disputed.

eBay watched the rise in volume of online payments and realized its fit with online auctions. eBay purchased Billpoint in May 1999, prior to the existence of Paypal. eBay made Billpoint the official payment system of eBay, dubbing it "eBay Payments", but cut the functionality of Billpoint by narrowing it to only payments made for eBay auctions.

For this reason, PayPal was listed in several times as many auctions as Billpoint. In February of 2000, there were approximately an average of 200,000 daily auctions advertising the PayPal service while Billpoint (in beta) had only 4,000 auctions. By April of 2000 there were more than 1,000,000 auctions promoting the PayPal service. PayPal was able to turn the corner and become the first dot-com to IPO after the September 11 attacks.

In October 2002, PayPal was acquired by eBay. PayPal had previously been the payment method of choice by more than fifty percent of eBay users, and the service competed with eBay’s subsidiary Billpoint. eBay has since phased out its Billpoint service in favor of retaining the PayPal brand. Most of PayPal’s major competitors have shut down or have been sold; Citibank’s c2it service closed in late 2003, and Yahoo!'s PayDirect service closed in late 2004. Western Union announced the December 2005 shut down of their BidPay service but subsequently sold it in 2006 to CyberSource Corporation. Some competitors which offer some of PayPal’s services, such as Wirecard, Moneybookers, 2Checkout, CCNow and Kagi, remain in business.

PayPal’s total payment volume, the total value of transactions in Q4 2006, was US$11 billion, up 36% year over year. The company continues to focus on international growth and growth of its Merchant Services division, providing online payments for retailers off eBay.

As of the end of Q4 2006, PayPal operates in 103 markets (including China), and it manages over 133 million accounts. PayPal allows customers to send, receive, and hold funds in 17 currencies worldwide. These currencies are the U.S. dollar, Canadian dollar, Australian dollar, Euro, Pound sterling, Japanese yen, Chinese renminbi, Czech Koruna, Danish krone, Hong Kong dollar, Hungarian forint, New Zealand dollar, Norwegian krone, Polish zloty, Singapore dollar, Swedish krona, and Swiss franc. PayPal operates locally in 13 countries.

Residents in 48 new markets can now use PayPal in their local markets to send money online. These new markets include Peru, Indonesia, the Philippines, Croatia, Fiji, Vietnam and Jordan. A complete list can be viewed at PayPal's website.

In China PayPal offers two kinds of accounts:

It is impossible to send money between PayPal.cn accounts and PayPal.com accounts, so PayPal.cn accounts are effectively unable to make international payments. For PayPal.cn, the only supported currency is the renminbi.

PayPal’s operation center is located near Omaha, Nebraska and PayPal’s international headquarters is located in Dublin, Ireland. The company also recently opened a technology center in Scottsdale, Arizona.

In March 2002, two PayPal account holders separately sued the company for alleged violations of the Electronic Funds Transfer Act (EFTA) and California law. Most of the allegations concerned PayPal's dispute resolution procedures. The two lawsuits were merged into one class action lawsuit. An informal settlement was reached in November 2003, and a formal settlement was signed on June 11, 2004. The settlement requires that PayPal change its business practices (including changing its dispute resolution procedures to make them EFTA-compliant), as well as making a US$9.25 million payment to members of the class. PayPal denied any wrongdoing.

In August 2002, Craig Comb and others filed a class action against PayPal in Craig Comb, et al. v. PayPal, Inc.. They sued for alleged mishandling of customer accounts and customer services, with regards to PayPal's user agreement. Allegations included the up to 180-day restriction on deposited funds until disputes are resolved, forcing customers to arbitrate their disputes under the American Arbitration Association's guidelines (a costly procedure), and requiring users to file claims individually, restricting class action suits. The court deemed these actions unconscionable and ruled in favor of Comb.

In the United States, PayPal is licensed as a money transmitter on a state-by-state basis. Although PayPal is not a bank, the company is still subject to and adheres to many of the rules and regulations governing the financial industry including Regulation E consumer protections and the USA PATRIOT Act. However, on May 15, 2007, PayPal announced that it would move its European operations from the UK to Luxembourg, commencing July 2, 2007 as PayPal (Europe) S.à r.l. & Cie, S.C.A. This would be as a Luxembourg entity regulated as a bank by the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg equivalent of the FSA. PayPal Luxembourg will then provide the PayPal service throughout the European Union (EU).

The PayPal Buyer Protection Policy claims that customers may file a buyer complaint within 45 days if they did not receive an item or if the item they purchased was significantly not as described. If the buyer used a credit card, they might get a refund via charge back from their credit card company.

PayPal protects sellers in a limited fashion via the Seller Protection Policy[4]. In general the Seller Protection Policy is intended to protect the seller from certain kinds of chargebacks or complaints if seller meets certain conditions including proof of delivery to the buyer. PayPal states the Seller Protection Policy is "designed to protect sellers against claims by buyers of unauthorised payments and against claims of non-receipt of any merchandise". Note that this contrasts with the consumer protection they claim to offer. This policy should be read carefully before assuming protection. In particular the Seller Protection Policy includes a list of "Exclusions" which itself includes "Intangible goods", "Claims for receipt of goods 'not as described'" and "Total reversals over the annual limit". There are also other restrictions in terms of the sale itself, the payment method and the destination country the item is shipped to (simply having a tracking mechanism is not sufficient to guarantee the Seller Protection Policy is in effect).

The company—by its own admission—uses automated systems to verify tracking numbers. If a seller has an item not received claim filed against them, they are required to enter a tracking number for the item. If they fail to enter a valid tracking number that shows a successful delivery, or even mistype the number by one digit, they will lose the claim automatically without a real person ever adjudicating the claim. In general, if a valid tracking number is entered which can be accessed online and shows a successful delivery, the seller will automatically win the claim.

The item significantly not as described claim is a more complicated matter. In this situation, the buyer has acknowledged the receipt of the item but has found the item to be "significantly not as described." The multi-level process provides an initial period of time for the seller and buyer to attempt to reach an agreement on their own. If the seller does not respond to the initial dispute from the buyer, or if the seller is unable to offer a settlement which is agreeable to the buyer, the buyer then has the option of escalating the dispute to a claim. If seller does not wish to communicate with buyer, the seller also may choose to escalate a dispute to a claim. The escalation from dispute to claim is not automatic; if a dispute is not escalated it will be automatically closed after a certain period of time. By escalating the dispute to a claim, the party is asking a PayPal representative to review the claim and make a settlement decision. In most cases, if the seller has been found to have misrepresented the item in a significant way, the buyer will be required to return the item to the seller at buyer's expense — and provide a tracking number for the return shipment — in order to receive their refund for the transaction. This policy is criticized as being in favor of the fraudulent seller. A seller can exaggerate the condition of his items and the worst that can happen is that he has the item returned. The innocent buyer has to pay return shipping and ends up out of pocket for something that was not his fault. This is in line with criticism of eBay's general policy of putting sales and its own profits above buyer protection against fraudulent sellers (for instance shill bidding).

If the seller has not been found to have misrepresented the item in a significant way, then the buyer's claim will be denied and the buyer will have no further opportunity for claims of any type using Paypal's systems. The only recourse the buyer would possibly have at that point would be through their credit card company (if payment was made using a credit card) or by filing a claim against Paypal through the Better Business Bureau or another similar consumer protection organization.

In 2000, PayPal began offering its customers the option of investing their funds in a Money Market account managed by Barclays plc. If a user activates it, the balance of their account begins earning monthly dividends. The rate fluctuates daily, but thus far has been around 5%, and this percentage is the same regardless of the account balance.

Funds are not insured by the FDIC. While other online bank accounts like ING Direct, Citi Direct, HSBC Direct, or Emigrant Direct offer comparable or higher percentage yields and are FDIC-insured, one major advantage of the PayPal money market account is the accessibility of it with no long term commitment.

In early 2007, PayPal introduced an optional security key to its users. This adds an additional layer of protection when logging into a PayPal or eBay account. Once a user enters their login ID and password, they are prompted to press a button on the small security key, then enter the six digit number to complete the login process. There is a one-time US$5 charge for this device, with no ongoing fees, however business accounts get them free of charge.


PayPal: The Private History (Summarized from "The PayPal Wars")

In September 2004 Bill Quick received a notice from PayPal, the online payment company that facilitated reader donations to his Daily Pundit blog. The notice warned Quick that his account was on hold, and that it would be terminated unless he removed "hate" content from his site. This appeared to be a reference to Quick's link to a video of a terrorist beheading. PayPal sent a similar letter to Jarlaynn Merrit's civil liberties blog TalkLeft. Neither site is at all hateful, and both linked to the beheading video for reasons that, while controversial, were certainly within the realm of civil discussion.

Both letters came a month after PayPal announced an abrupt shift in its terms of use. The company would no longer permit customers to use the service for purchases associated with "mature audiences," gambling, hate paraphernalia, or prescription drugs, along with a long list of other prohibitions. It would also fine its customers up to $500 for attempting such transactions. Those terms apparently applied to donations to blogs with content PayPal found objectionable.

That's a far cry from the libertarian vision founders Peter Thiel and Max Levchin originally had for PayPal, an online payment service that enables account holders to send money to anyone in the world with an e-mail address. Thiel and Levchin had hoped PayPal would grow to become an extra-governmental system of currency, something reminiscent of the world described in Neal Stephenson's novel Cryptonomicon, in which programmers use encryption to create an offshore data haven free from government control.

Thiel is a philosophy major who drew inspiration from Aleksandr Solzhenistyn; Levchin a Ukranian Jew who grew up in the former Soviet Union and immigrated to Chicago with his family in 1991. They met in Silicon Valley in the late 1990s and over a series of lunches began to collaborate on marketing a method of data encryption that would let users safely send information between two personal digital assistants (Palm Pilots, for example). Thiel and Levchin eventually decided that the most practical application of the technology was money--specifically, the ability to "beam" funds between PDAs without currency, checks, or credit cards. At a conference in July 1999, representatives from Nokia Ventures and Deutche Bank used the encryption technology to send Thiel $3 million in venture capital via a Palm Pilot. Confinnity, later to become PayPal, was born.

A speech Thiel gave to Confinnity employees, just a few days after he began work, in which he described his hopes for PayPal to become a borderless private currency. He saw PayPal facilitating trade in currency for anyone with an Internet connection by enabling an instant transfer of funds from insecure currencies to more stable ones, such as U.S. dollars. Thiel explained to his young staff how governments had historically robbed their own citizens through inflation and currency devaluation. The very rich could always protect themselves by investing offshore. It's the poor and middle class, Thiel explained, who get screwed. "PayPal will give citizens worldwide more direct control over their currencies than they ever had before," Thiel predicted. "It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure."

Though he touches on brushes with nearly a dozen would-be competitors to PayPal, much of Jackson's book follows the continuing tug-of-war between PayPal and eBay, the online auction behemoth. Early on, Jackson had smartly identified eBay users as ideal potential PayPal customers. Jackson recounts how, as his marketing overtures began to bring in high-volume eBay sellers, PayPal struggled to innovate, adapt, and scale up its customer service support to meet their needs. When PayPal's early success began to overwhelm its own customer service staff, for example, the company didn't have the capital to hire additional help. Executives temporarily staved off the problem by sending the company's reps to post answers to common problems on high-traffic message boards frequented by online auctioneers. The strategy reduced call volume without much additional labor.

PayPal was again challenged when hackers, sophisticated crooks, and even international mobsters began to use the service for fraud and money laundering. The company's tech team responded with an ingenious yet simple way to distinguish human beings opening accounts from mechanized "bots" designed to open hundreds of fraudulent accounts at once. The "Gausebeck-Levchin" test imposed an image of black letters set against a yellow background with crisscrossing lines, and asked the new user to enter the letters he saw on his monitor to proceed. Human customers could discern the letters easily, but programs pretending to be human couldn't. The test is still in wide use today among e-commerce sites plagued by automated fraud.

At the same time, eBay was aggressively pushing its own online payment system, called Billpoint. Jackson recounts several episodes in which eBay issued new policies specifically designed to give Billpoint an advantage over PayPal, such as demanding smaller logo sizes from outside vendors or changing auction procedures and settings in ways that transparently favored Billpoint. PayPal's challenge was to respond to the new policies, win any ensuing public relations war that might result from them, and keep its own customers happy and loyal along the way.

What's interesting is that though the eBay struggles are the most frequent source of conflict in The PayPal Wars, it's during these battles that PayPal is at its most competitive, its most innovative, and its most responsive. When Billpoint entered into a partnership with Visa, for example, PayPal responded by offering its customers a PayPal debit card and giving them cash back each time they used it. Each eBay policy change aimed at outside vendors pushed PayPal not only to comply and adapt on the fly but to find new ways to communicate the new policies to its users quickly.

PayPal ultimately won the battle with Billpoint, despite the decided disadvantage of having to compete within the framework of Billpoint's parent company. For months, Billpoint's listing share (the percentage of eBay auctions accepting Billpoint payments) hovered around 25 percent, while PayPal's climbed to more than 70 percent.

By October 2001 PayPal was at the brink of escaping the dot-com peril. It was the preferred payment method for just under half of all eBay auctions, its registered users numbered more than 12 million (after just 22 months of operation), and more than a third of its payments came from sources other than auctions, demonstrating the company's ability to broaden its user base. More important, despite burning through capital on payroll, bonuses for users who brought new accounts, and marketing, profits soared, and the company achieved its first positive cash flow for that month. It would go on to turn its first profit in the fourth quarter of 2001.

PayPal consequently decided it was time to begin filing for its initial public offering. That's when the regulators, lawyers, and politicians moved in.

The first shots came from the media, which were skeptical of the new economy after the NASDAQ bust and agitated at having been duped into hyping so many failed dot-coms. Industry publications hinted that the IPO was PayPal's way of shopping for a savior, while one Silicon Valley lawyer wrote in the California legal publication The Recorder that PayPal was an ideal money laundering mechanism for "drug dealers and domestic terrorists," despite the successful anti-fraud devices concocted by Levchin's tech team. Having already entered the mandatory pre-IPO "quiet period"--a relic of Depression-era reforms--PayPal was prohibited from responding to its critics.

Next came a rash of lawsuits. Some came from competitors who Jackson says sought to cash in on a company keen to deflect negative publicity so close to its public offering. The first lawsuit, for example, was from a company called CertCo, which claimed PayPal's payment system violated one of its patents. It was settled for what the terms called a "non-consequential" payment.

But class action suits followed--four during one four-month stretch of 2001 alone. Some illustrated the damned-if-you-do, damned-if-you-don't dynamics of running a small business. MasterCard, for example, fined PayPal $313,600 for excessive credit card "charge backs" (that is, credit refunds), a good indicator that the service was being used for fraud. As mentioned, Levchin and the company's tech team had addressed those problems and cut fraud by a third. But those anti-fraud measures triggered more scrutiny. One class action suit accused the company of mistakenly freezing the accounts of several users for up to a week while it investigated suspicious activity.

Finally, the politicians and regulators came calling. Just hours before PayPal was set to go public, the state of Louisiana ordered it to terminate all business in that state, asserting that the company had failed to obtain a "money transfer license," which many states require from anyone in the businesses of cashing checks, transmitting money, or exchanging currency. New York threatened a similar order. The Louisiana decree was issued under the pretense of "protecting consumers," though terminating service in that state would have left all of Louisiana's PayPal-using auctioneers in the lurch.

The company managed to negotiate its way through these obstacles, and in early 2002 PayPal successfully launched its IPO. Salomon Smith Barney priced the initial 5.4 million shares available to the public at $12 to $14 each. The entire company consisted of 60 million shares, giving PayPal a market value of $720 million to $840 million. On the first morning of trading, under the ticker symbol PYPL, PayPal opened at $13 per share but jumped to $18 within minutes. Shares peaked at $22 in the mid-afternoon before settling at a little more than $20 at the close of trading. The 50 percent increase represented the first successful IPO since September 11 and a significant achievement for an e-commerce company in the post�tech bubble market.

But PayPal's regulatory troubles persisted. The banking industry had tried and failed several times to set up competitors to PayPal and Billpoint. As entrenched industries often do, it turned to government when its efforts in the marketplace failed. Oregon, California, Illinois, and Louisiana subsequently sent Billpoint notices that it had failed to get a money transfer license. A director from the American Banking Association told CNET that online payment services should be classified and regulated as commercial banks--a move that likely would have killed off all online payment services except those run by existing banks.

More class actions followed. New York Attorney General Eliot Spitzer cited PayPal for posting a user agreement that "wasn't clear enough." He also subpoenaed all documents pertaining to PayPal's use in online gaming sites, suggesting the company was in violation of New York gambling laws. Spitzer's investigation was followed by a U.S. Justice Department determination that PayPal's use by gaming sites was a violation of the USA PATRIOT Act.

The financial pressures of battling aggressive government officials and opportunistic class action lawyers, all while trying to stave off a better-funded competitor, soon became too much for the still-young company to bear. "It was clear," Jackson writes, "that PayPal now faced many challenges outside the marketplace. Entrepreneurial nimbleness may have helped us survive the company's post-merger internal turmoil and Billpoint's fierce competitive charge, but these new threats would require a different approach."

In July 2002 PayPal executives sold the start-up firm to their longtime nemesis, eBay. Jackson notes that the sale had some obvious benefits. The company's new parent already had a formidable, well-funded legal team in place to deal with PayPal's litigation and regulation troubles. Also, eBay promised to do away with Billpoint, essentially securing PayPal's position as the premier online payment provider.

But there were significant drawbacks too--most of them for consumers. Instead of allowing its customers to transact voluntarily with anyone they please, eBay, whose conciliatory approach is touted within the company as its "culture of community," settled the PATRIOT Act charge with the Justice Department for $10 million and agreed to bar its customers from using the service for online gambling. Shortly thereafter, PayPal announced the even stricter policy that ensnared Quick and Merritt (though both accounts were later reactivated). The new terms of service prohibited the use of PayPal not only for adult-oriented purchases but for "non-adult services whose Web site marketing can be reasonably misconstrued as allowing adult material or services to be purchased using PayPal."

PayPal today is a far cry from Thiel and Levchin's dream. It's a far cry even from pre-IPO PayPal. Most of the bright young minds Thiel brought in to get the company airborne left shortly after the takeover. Safely nestled within the belly of the eBay monopoly, and without Billpoint to foster a competitive itch, PayPal is far removed from the market forces that sparked the rapid innovation and entrepreneurial fire that marked its early days. Blogs bristle about PayPal's unfriendly terms of service, its difficult account management, and its tendency to freeze accounts and bar access to the assets in them. Two popular sites, paypalsucks.com and paypalwarning.com, have sprung up to document user frustrations.

PayPal's story is a sad but instructive lesson in how this country treats its entrepreneurs. PayPal is huge and growing. With eBay branding, it now boasts 73 million users, making it by far the largest online payment service. But it's nothing like what it was intended to be: a way for people to protect the money they earn from greedy governments and protect private purchases from the prying eyes of regulators. Greedy governments and prying regulators saw to that. The company sold out to eBay not because eBay beat it in the marketplace, not because eBay offered a better product, and not to reap a financial windfall for PayPal employees. PayPal sold out because, after the beating it took from those claiming to represent the interests of consumers, selling itself was the only way to keep the company alive. Exactly how consumers benefited from that isn't clear.


PayPal: From an Ex-Manager's Perspective

During the late 90's and well into the years 2000, 2001 and 2002, I was what you would call a "middle management" PayPal employee. I decided to leave PayPal due to my disgust over their internal security policies which have led to the mountain of complaints seen on this and other similar websites. There aren't many ex-PayPal employees who go "public." During a PayPal employee's "exit interview" a soon-to-be-former manager is warned, intimidated and threatened against doing the very thing I'm doing right now. But since I left to start my own business, there's not a thing they can do to me.

Pay-Pal DID start as an honest, legitimate company with an innovative service concept. However, in my opinion, this concept can never actually WORK in the real world because there are legions of scammers all over the globe with reams of stolen credit card info and identifications just WAITING to swoop down on any new "payment service" like this that comes along. Credit-card transactions where the "card is not present" and thus personally examined by a clerk account for the overwhelming majority of fraud transactions. Comparatively, there's very LITTLE credit card fraud at Wal-Mart, because the cashier actually sees both you and the card- and can ask for supporting identification at the point of sale. Unfortunately, the high-risk, "card not present" transactions are the ONLY kind of transaction a company like PP can do, and boy- did the con artists find them in a hurry! The basic con was (and is) to use stolen identification information to open new PP accounts, funnel money into them with stolen credit card numbers, then transfer the money OUT of the account before PP gets the charge-back and can freeze it. Unfortunately, despite PP's claims of having a "tough anti-fraud program", these people are mostly impossible to catch, because when opening a new PP account, they DO have all the proper-appearing ID information (which was stolen or conned out of unsuspecting individuals, most of whom have never HEARD of Pay-Pal). When fraud is uncovered and the account is checked out, the perp is almost never caught, since it was almost always opened under a stolen identity, and he's long abandoned the mail-drop.

Yes, the application process COULD be made more stringent, but it is felt (probably correctly) that a brand-new customer would certainly balk at doing things like sending in notarized copies of their driver's licence and so forth. So an "alternate strategy" for offsetting the charge-back losses slowly evolved at PP. It's the perfect scheme really; since PP can't usually catch the scammers and doesn't want to loose customer base by making things more stringent to start with- they decided to simply re-coup their chargebacks from the pockets (and accounts) of good, solid people under the easily-defensible and impossible-to-criticize guise of "Fraud Prevention and Enforcement".. Simply put, if you're a seller and somebody pays you with a stolen credit card, you're targeted by PP security and might very well have your account seized, "investigated", closed- and the money retained by PP. (Yes... they simply "add" it to their revenues and spend it like any other income. You basically gave them permission to do this under the "terms and conditions" you originally agreed to. No, I KNOW you didn't really read it, but I bet you will the next time!). Even if the person paying you has NOT used a stolen credit card, he could have been been flagged by PP as "somebody to keep an eye on" for any one of numerous reasons. If he does business with YOU, especially multiple times- you're frozen. OCCASIONALLY some lucky soul will complain about the seizure, and when the case is "investigated" by PP he is "cleared" and the money unfrozen. This good fortune has nothing to do with an actual "investigation" (there aren't any, really). Pay-Pal WILL unfreeze a small percentage of the accounts (as a future defense against a potential class action), so you MAY benefit from a simple luck of the draw. See, if it ever comes down to a massive class-action lawsuit, or even testimony before the SEC or other regulatory body, PP wants to be able to stand up in court and say "But your honor, we DON'T just freeze accounts and pocket the money. We really DO perform a painstaking investigation. Here's the proof... look at all these people who WERE suspected, but were then cleared by our "crack security staff"! If this was really a scam, why would we have given all of THIS this money back?"

I'm amused by the posts that say, "But I've been a good customer of PP since the beginning and have paid thousands in fees.... why would they have done this to ME?" Let me answer that with a hypothetical question: If you were an unregulated financial services company so embittered by fraud losses that you, yourself, had completely lost whatever moral compass you might have once possessed, what would YOU rather have: a happy, content customer who's business might account for $5000 worth of fees over the next 10 years, or a person who's pissed off and will NEVER do business with you again, BUT you've got his $5000 up-front, TODAY- seized directly out of his account with no appeal possible. Believe me, it's a no-brainer to these people. They have sort of developed a weird corporate mind set wherein their past (and ongoing) victimization at the hands of con-artists somehow gives them license to "pass it along" to others. Think the E-Bay purchase will make it all better? Guess again. If ANY company knows the reality of on-line schemes and scams, it's E-Bay. While they certainly know that a nice chunk of their fees come from people who ultimately turn out to be thieves (but hey... their money is just as green as that of the honest folks) do you think E-Bay wants to open THEMSELVES (or a subsidiary company) up to the same risks as their bidders are exposed to? No way.

On another issue, I see lots of complaints from those who have BOUGHT things and paid through PP who find their credit cards suddenly drained and/ or billed multiple times for the same transaction. The answer is simple; PP has very lax hiring procedures, ESPECIALLY compared to the standards any bank would impose on anybody employed in a similar position of trust. But don't forget- PP ISN'T a bank, so they feel no obligation to hire (and, of course, compensate) people as if they were. Unlike the "account freezing" thing, the scams pulled on buyer's credit cards aren't a part of any "master plan" by the company, but simply the work of some dishonest employees who nonetheless have access to ALL of a customer's personal information. Yes, it's scary. Schemes are rampant where a PP employee has a cousin or friend set up an account to receive payments in another name. Since it's an "inside job", these "phantoms" will, of course, sail through the PP application process with flying colors- even if all of the information was simply "made up". Then your easily-accessable credit card number is used as payment for phony "auctions" and so forth done through the phantom account. The PP employee who actually approves this transaction might very be the one running the scheme! Given their system and the way the computers are networked together, this is pretty simple for almost any employee to do. Even if you DON'T have access to the PP customer database, you almost certainly have lunch in the break room or visit at the water cooler with someone who does. Many people have been quietly terminated for this (rarely, if ever prosecuted- since this would be a huge black eye for the company), and in reality, THIS is where the majority of PP security and investigative resources go: to policing their shoddily-selected workforce.

So, If you STILL want to use PP- here are a few tips for merchants to avoid being taken by them. But really; from a moral and ethical point of view- would any decent person want to be in a position of supporting this ongoing Ponzi scheme- even if it COULD be guaranteed that you, personally wouldn't be ripped off by it?

  1. Give PP only ONE account to access, then make sure that the monies are cleaned out the moment deposited funds become available- and transferred to an account that PP can't touch.
  2. After somebody has paid you through PP, NEVER do business with that individual a SECOND time- at least not through Pay Pal. This is a huge red flag to them, since scammers who get hold of a good credit card number but don't know the spending limit will "hammer" it through the same PP account several times until it's maxed . Don't forget- they're looking for ANY remote justification for seizing your money- since under the "terms and conditions" you agreed that this was OK with you.
  3. Never, ever, do business with anybody from Asia or Africa. ESPECIALLY Nigeria. With PP "security", you're venturing onto slippery ice even if you deal with a bona-fide American with an African or Asian sounding name. No kidding. I don't mean to sound like a racist here- but that's simply the way it is: an automatic "guilty until proven innocent" red flag.
  4. If you ARE frozen, accept the reality that this isn't some mistake that can be corrected by an e-mail or phone call to a nice customer service person; you've been SCREWED, and it's NO accident or misunderstanding. This company is now your enemy and is probably not inclined to do anything to help you, unless you're one of those unfrozen for "show" purposed as described above- but I'll bet they don't even account for 2%. So don't waste your time with "customer-no-service" e-mails and phone calls. Yes, most of the contact numbers listed on this site are accurate and the people listed are real employees- but believe me; they generally have NO power to say anything but "NO." If you've been frozen, your "case" goes to a special group within "customer service" who's entire mission statement could be summed up as "we've got the money, we're going to keep the money, so explain this to the customer in any plausible fashion- as long as the final answer remains ''we get to keep the money'." Also, these folks will often be extremely rude to you- which is all part of the plan; you weren't really supposed to call them in the first place, and they don't want you to even THINK about calling back. Those repeated requests for copies of drivers licenses and so forth are simply a ruse and a stall tactic. Believe me... they KNOW who you are, and this information does NOT keep getting misplaced. They're wearing you down, and it usually works. By the THIRD request for you to gather and send the same information, they most people will simply give up and say "it's not worth it." Don't threaten to sue or waste your money having a lawyer send PP a threatening letter, 'cause it doesn't work. People who SAY "I'm gonna sue" DON'T 99.9% of the time, and PP knows this. What DOES work is to hire an attorney and actually FILE SUIT. When they're hit with requests for discovery and are faced with having to send executives to depositions and so forth- most of the time your case will be "re-investigated". You'll then be cleared and your money will be returned. If that doesn't fix it, then, for some reason Pay-Pay must really, really feel that you ARE scamming. Most people simply won't go this far, since hiring an attorney, filing suit and so forth actually exceeds what PP has taken from you- and believe me, they DO know this.

For buyers the answer is real simple: NEVER use PP under any circumstances. Ever. You simply have NO control over who has access to your information, and your bank wouldn't touch some of these PP people with a ten-foot pole. Want to use a credit card to pay for an auction item but don't want to get double and fraudulently billed? Go down to the bank, use that same credit card to buy a cashiers check, then mail it to the seller. You have the exact same protection doing business that way as you do through Pay Pal, but you avoid the numerous risks of involving yourself with them- which, of course, go WAY beyond having to eat a thousand dollar loss because some guy didn't send your merchandise.

Looking for an alternate payment service? I can't honestly recommend one, since all of the others are prey to the same vultures that hit PP so hard. So I guess the system that works the best is one I'd simply call "pay, pal... "; you simply do business the old fashioned way: check out the seller as best you can, write a check and hope for the best- or simply deal locally. Given the realities and risks of "card not present" credit card transactions, I can't honestly see how any company who tries to do what Pay-Pal does could avoid becoming just like them, or else find themselves forced out of business under a mountain of chargebacks.

Anonymous -- Ex PayPal Manager


Footnote in History: PayPal's 2004 Outage

Did you know that in October 2004, PayPal was shut down for a little more than five days?

Millions and millions of dollars were lost during those days that PayPal was unavailable to the public. Thousands of customers reported that there businesses were in effect destroyed by PayPal. Why? Sellers began to receive piles and piles of negative feedbacks from angry buyers. Buyers were on the receiving end as well -- with angry sellers wonder why their payments were not being received in a timely manner.

The outage was a result of PayPal's incompetence in upgrading its system. Since PayPal was having problems meeting the current demand for its services, PayPal rushed into a system upgrade without fully testing their new system under peak demand conditions.

Here is PayPal's explanation for the outage: "These PayPal issues are the result of unforeseen problems that resulted when a new code base to the upgrade the site architecture was introduced to the PayPal platform on Friday morning. The code worked well when tested and during the first hours of launch. Unfortunately, problems handling peak levels of traffic developed later in the day that created intermittent availability and errors for members."

Such an outage could occur again -- but this time more serious. What would happen if PayPal's system crashed again? But this time leaving the system open to hackers who will steal your personal and financial information? What would happen if all of your account information was wiped out along with your PayPal account? PayPal is difficult to deal with now, how hard would it be to try and get your money back then?

According to PayPal's User Agreement, they are not responsible for any losses that occur should something happen to their system. For more information on this, please read this site's TOS EXPOSED section.


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